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biography

Jeffrey Thompson, Assistant Research Professor in Economics, University of Massachusetts at Amherst, focuses primarily on domestic economic policy, with particular emphasis on the New England region and public finance at the state and local government levels. Jeffrey comes to PERI from Syracuse University, where he recently completed his Ph.D. in economics with a dissertation on how migration influences the ability of states to use their tax codes to redistribute income. Prior to his Ph.D. work, Jeffrey was a labor analyst at the Oregon Center for Public Policy for six years and received his Master's degree from the New School for Social Research.

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transcript

We're now discussing Jeffrey Thompson's research paper looking at the actual evidence of what happens when you raise taxes on the wealthy. States across the country have massive decreases in their revenue because of the recession, and mostly they're making it up through cuts. Well, Jeffrey's paper argues that you could raise revenues on the wealthy and in fact increase growth and jobs, not decrease it as some people are arguing. And now joining us is Jeffrey Thompson, who's an assistant research professor at PERI at UMass in Amherst. Thanks for joining us.

JEFFREY THOMPSON, ASST. RESEARCH PROF., POLITICAL ECONOMY RESEARCH INST.: Thanks for having me.

JAY: So people should watch part one, 'cause this is a continuation of our discussion. So let's pick up on a couple of the arguments against this kind of raising of taxes. And the big argumentsâamongst the big arguments, at any rate, is, one, affluent people simply won't work as much, in the sense that if you're a highly paid hourly worker like a lawyer or, I guess, a doctor or something and the last hours of what you work are so highly taxed you might as well go play golf, that's one argument. The second is: really affluent people will just spend their time trying to avoid taxes and not investing in stuff. Pick up on some of these questions that have challenged your proposition.

THOMPSON: Sure. At the root of it, you know, we expect that everyone isâwhen they're making decisions about working, how much to work, you know, effectively they're comparing, you know, what's it worth to them. So they're making a cost-benefit calculation. And if you're reducing their after-tax returns to their efforts, there, you know, it makes sense that they will pursue less of those efforts.

However, it's a real empirical question. So when researchers have tested those questions about hours of work or labor force participation, what have they found? Ultimately what looks to be the case is that male workersâso men who are fully attached to the labor forceâthe evidence overwhelmingly suggests they're not remotely at all tax sensitive. Even fairly large tax changes don't seem to have any impact on their likelihood that they're in the labor force or how many hours they choose to work, 'cause there's just no evidence at all.

In response to massive tax changes, such as the very large reductions in tax rates that were built into the 1986 federal tax reform, what that research shows is that wives of married couples, following a cutting in half of the top marginal tax rate, they were somewhat more likely to pursue paid employment, because the first hour of their work effort was automatically subject to the highest marginal tax rate. So some types of workers have been found to be responsive in their labor force participation to massive tax changes. But overall, high-income people are expected to not respond at all in terms of their labor efforts.

JAY: I mean, I guess if you're in the 1 percentile, it's not really about your hours of work anyway. It's kind of more aboutâI mean, in terms of hourly workers, you're hiring management or you're investing in funds. It's kind of more about whether you're going to do less of that because you're taxed more. Is there any evidence on that?

THOMPSON: Yeah, there is evidence. There's evidence both onâfrom the negative evidence, there's evidence to suggest that tax changes don't have impact on the likelihood that people will start new business ventures. And we can go into some of that. But there's also evidence more on the positive side about the utilization of additional tax planning, so taking steps to avoid paying the tax by making moves on paper. So they're not modifying their, quote-unquote, "real" economic behavior, but they're taking advantage of tax shelters. And so thatâthere is evidence to suggest that that does occur in practice.

JAY: I mean, one of the arguments that's made is that this is going to kill small businesses, these kinds of income tax, that why start a small business if your income tax is going to go up so much. What is your research on that?

THOMPSON: Well, there's a big literature on this kind of question. And in fact what it shows is something completely different than what the political discussion might lead you to believe. In fact, many studies find that there is a positive relationship between raising income taxes and the likelihood of starting a business. Why is that? Well, in fact, because people can write off the losses from small business ventures, the value of that sort of write-off insurance is greater when the tax rate is higher. So, you know, if there's no ability to write off your risky venture into a new business, the impact of that loss will be greater if you can't write it off. So it in fact in some ways underwrites people's business ventures.

And if we also step back from the question of the behavioral response, small businesses rely on having a smooth-functioning infrastructure. They rely on being able to hire good quality workers. So even mid- and small-sized businesses count on good quality public services in terms of education and public safety. So the idea that the small business community is the business sort of storming the gates to push down government, you know, public services, just doesn't really mesh with reality, I think.

JAY: I mean, we haven't even talked about what it does to small businesses and larger businesses in terms of their own market, when purchasing power is so much lower through layoffs at the state level and all the ripple effects of layoffs when states and cities spend less.

THOMPSON: Yeah. And those effects, those demand-side effects, especially in a down economy, are absolutely going to dominate the hiring and firing and start-up and closing decisions of businesses. So those are far more important. You know, you think about the corporate income taxes are going to be paid only by firms that are succeeding. They're going to be paid only by firms making a profit. And so if in you're in some senseâyou know, I don't want to be too glib about it, but the companies that are paying corporate income taxes are in fact the lucky onesâthey're lucky enough to be in that condition to be generating profits. And it's the tax instruments that are designed to only be levied on the successful companies that are the ones that can have a positive distributional picture. It's the taxes that hit all companies, whether it be sales taxes or property taxes or payroll taxes, that are the ones that actually, you know, have a much higher chance of hitting the bottom line of a business that's struggling, and that also hit low-income households at the same time.

JAY: So the argument about taxing the upper income, the argument actually would go that it's in small businesses' interest, both in terms of what it does in terms of their own tax situation and tax losses, as you suggested, and less burden on property taxes. And in terms of market, there's more purchasing power. So if there's less cutbacks in terms of layoffs of teachers and such, which also would help small businessâ. But it's not an argument you hear coming from small-business representatives very much. On the whole, small-business organizations seem to be manning the barricades against taxing the wealthy.

THOMPSON: You do see that, but you see those arguments made most forcefully from the D.C.-based lobbying arms of national organizations. At the local level, in terms ofâor even at the state level, in terms of real-world debates over cutting services or levying higher income taxes, I think there are plenty of individual small business owners that step forward and say, we think it's worth it. And, in fact, we as an individual small business will be impacted very likely by the tax, but we'll suffer greatly by the service cuts. So the most strenuous opposition, I think, really is from the lobbying arm, which probably is most predominantly financed by the handful of companies that are hugely profitable and would actually be the ones paying the tax.

JAY: Right. Okay. In the next segment, we're going to dig into this issue of: will the wealthy hit the road if states increase the tax on the upper end. Please join us for the next segment of our interview with Jeffrey Thompson on The Real News Network.

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